Causes of Inadequacy of International Liquidity
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Causes of Inadequacy of International Liquidity

Causes of Inadequacy of International Liquidity The main reasons advanced for the inadequacy of liquidity are as follows: (i) While, on the one hand, total gold reserves have grown since 1950 at 1.4 per cent per year; and total international liquidity at 2.7 per cent per year, on the other hand, the world trade has since 1950 grown at the annual rate of 7.5 per cent per year, in other words, the supply of liquidity has not been keeping pace with the demand for liquidity.

Causes of Inadequacy of International Liquidity

 

The main reasons advanced for the inadequacy of liquidity are as follows:

(i) While, on the one hand, total gold reserves have grown since 1950 at 1.4 per cent per year; and total international liquidity at 2.7 per cent per year, on the other hand, the world trade has since 1950 grown at the annual rate of 7.5 per cent per year, in other words, the supply of liquidity has not been keeping pace with the demand for liquidity. The world trade is expected to grow in the future at 6 per cent to 7 per cent annually; therefore, the total reserves should also grow at least by this rate.

 

(ii) Distribution of liquidity among the various countries of the world is also very uneven. Some countries have too much liquidity, -whereas others have too little. For example in 1968, the E.E.C. countries and Switzerland held over 40 per cent of the total gold stock in the world. The US.A. and these countries between them still had more than 75 per cent of the gold stock.

 

(iii) The supply of gold—one of the major components of liquidity—is very much limited and also cannot be increased according to the needs. For example, during the period 1958-68, gold has not practically contributed to the growth of international liquidity. The total stock of world gold, which was 38.0 billion of U.S. dollars in 1958, increased to 38.9 billion of U.S. dollars in 1968. Therefore, the growing need of international reserves could be met by increasing the supply of the key currency, i.e- Dollars. But the supply of the U.S. dollar is ultimately linked with her gold stock and her external position. In the present times, however, the chances of increasing the supply of dollars are very limited.

 

As long as there is confidence in the key currency, it will be acceptable internationally and will, therefore, serve as an international medium of exchange. But this confidence in dollar was shaken. The ability of the U.S.A. freely to convert these dollars into gold was called into question. On August 15, 1971, the U.S.A., announced that it was no longer prepared to buy and sell gold freely, which undermined the present system considerably. Now under the present system, supply of dollar, hence liquidity, can be increased only if the U.S.A. is willing to have more and more deficits in her balance of payments which seems to be next to impossible under the present circumstances.

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